ECON TEST 3

Indicator Six: Business Confidence

Business confidence tells you what managers are planning. When it starts to fall, a recession might be on the horizon.

Indicator Seven: Consumer Confidence

Consumer confidence tells you what consumers are thinking. It rises when consumers are upbeat about the economy.

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 1%, and the output gap is -0.5%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy? 0.5% 3% 2% 1%

Correct! 2%

Mandatory spending is spending that: supports programs that do not get determined annually but instead are set in law. is appropriated by Congress annually. includes all federal government spending. includes all state and local government spending.

Correct! supports programs that do not get determined annually but instead are set in law.

An example of a lagging indicator is: consumer confidence. business confidence. unemployment. the stock market.

Correct! unemployment.

Which indicator tells you how fast wages and benefits are rising? Employment cost index Inflation Business confidence Stock prices: S&P 500

Employment cost index

Indicator Two: Real GDI

GDI (gross domestic income) is calculated by adding up total income. GDI often flashes warning signs for the economy sooner than GDP does.

Indicator Five: Initial Unemployment Claims

Initial unemployment claims tell you how many people lost their jobs and applied for unemployment the previous week. They offer a timely insight into what is happening.

Indicator Three: Nonfarm Payrolls

Nonfarm payrolls track how many jobs are created each month. They provide an early and reliable look at how quickly the economy is creating jobs.

Indicator One: Real GDP

Real GDP is the broadest measure of economic activity. It measures total production, total spending, and total income across the whole economy.

Indicator Nine: Employment Cost Index

The employment cost index tells you how fast wages and benefits are rising. Rising compensation is a sign of a healthy economy.

Indicator Eight: Inflation Rate

The rate of inflation tells you what's happening with prices.

Indicator Ten: Stock Market

The stock market tells you about the future expected profits of businesses.

Indicator Four: The Unemployment Rate

The unemployment rate is a snapshot of the strength of the labor market. It's a measure of excess capacity.

The international trade effect is the: inverse relationship between prices and investment. positive relationship between prices and investment. inverse relationship between domestic prices and net exports. positive relationship between domestic prices and net exports

inverse relationship between domestic prices and net exports.

If the actual inflation rate is less than the target inflation rate, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment. raise; down raise; up lower; down lower; up

Correct Answer lower; up

Payroll taxes are 6.2%, and Medicare taxes are 2.9%. If your employer owes you $665, approximately how much will you get after these deductions? $19.29 $41.23 $60.52 $604.49

Correct! $604.49

The higher the GDP deflator in an economy, the: (i) higher the purchasing power of the currency. (ii) lower the real wealth in the economy. (iii) higher the real wealth in an economy. (iv) more expensive the country's exports. (i) only (i), (ii), (iii), and (iv) (ii) and (iv) (i), (iii), and (iv)

Correct! (ii) and (iv)

If inflation is 4% and a firm gives its workers a 1.5% nominal wage raise, then: real wages have gone up by 2.5%. inflation decreases by 1.5%. inflation rises by 1.5%. real wages have fallen by 2.5%.

Correct! real wages have fallen by 2.5%.

In order to boost output, the federal government engages in _____ fiscal policy, which _____ government spending and _____ taxes. expansionary; lowers; raises expansionary; raises; lowers contractionary; lowers; raises contractionary; raises; lowers

Correct! expansionary; raises; lowers

If a government is using spending and tax policy to attempt to stabilize the economy, it is using: mandatory policy. monetary policy. fiscal policy. trade policy.

Correct! fiscal policy.

Ther Fed creates a lower and upper bound for the federal funds rate and the incentives that drive financial institutions to move the federal funds market to that target. Select the tool(s) the Fed uses to create an upper bound for the federal funds rate. pays banks interest on excess reserves borrows money overnight from financial institutions lends directly to banks through the discount window

Correct! lends directly to banks through the discount window

Based on Okun's rule of thumb, if you forecast that the output gap will decline from -2% to -3%, the unemployment rate will: fall by 1%. rise by 1.5%. rise by 1%. rise by 0.5%.

Correct! rise by 0.5%.

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. What happens to prices and GDP when imported inputs become cheaper? Both prices and GDP increase. Both prices and GDP decrease. Prices increase, and GDP decreases. Prices decrease, and GDP increases.

Correct Answer Prices decrease, and GDP increases.

You are a financial adviser. Your client, Mena, does not like risk and wants Federal Deposit Insurance Corporation (FDIC) insurance. Which of the following instruments should she invest in? Treasury bills A bank savings account An index fund Bonds issued by a corporation in financial distress

Correct! A bank savings account

Which economic indicator accounts for changes in the composition of the workforce? The level of real GDP Real GDP growth Nonfarm payrolls The employment cost index

Correct! The employment cost index

Which of the following are reasons why the Fed targets an inflation rate greater than 0%? Inflation (select all that apply) enables the labor market to function more smoothly enables the Fed to more effectively fight recessions helps avoid the risk of deflation at 0% keeps the purchasing power of consumers stable

Correct! enables the labor market to function more smoothly Correct! enables the Fed to more effectively fight recessions Correct! helps avoid the risk of deflation

Complete the following passage explaining how the average American is affected by monetary policy changes. If the Fed raises the interest rate on excess reserves, the ______________________ to banks of loaning money ______________. The supply of loanable funds therefore _________________, pushing interest rates _______________, and banks, correspondingly ______________ the interest rates they charge on car loans, mortgages, student loans, credit cards, etc. marginal benefit, falls, rises, downward, lower marginal cost, rises, falls, upward, raise marginal cost, falls, rises, downward, raise marginal benefit, rises, rises, upward, lower

Correct! marginal cost, rises, falls, upward, raise

How can high government debt lead to slow economic growth in the future? (i) Stock markets will weaken. (ii) Governments may find it hard to fund other spending such as infrastructure projects. (iii) Governments may increase future taxes to pay interest payments on rising debt. (iv) Governments borrow funds that might otherwise have been used for investment. (i) only (ii), (iii), and (iv) (iii) and (iv) (iv) only

Correct! (ii), (iii), and (iv)

How is monetary policy different from fiscal policy? Monetary policy adjusts interest rates, whereas fiscal policy adjusts government spending and taxes. Monetary policy focuses on correcting inflation, whereas fiscal policy focuses on unemployment. Monetary policy is determined by the president, whereas fiscal policy is determined by the chair of the Federal Reserve. There is no difference between the two policies.

Correct! Monetary policy adjusts interest rates, whereas fiscal policy adjusts government spending and taxes.

A firm's real sales rise by 3% this quarter. Is this a sign of a booming economy? Yes, this is positive sales growth. No, only sales above 5% growth indicate a strong economy. No, the sales growth might have been negative in the previous quarter. No, the sales have not been adjusted for inflation.

Correct! No, the sales growth might have been negative in the

When inflation rises above its target rate, the Federal Reserve will: increase taxes. place a ceiling on interest rates. raise interest rates. lower interest rates.

Correct! raise interest rates.

If an economy has a positive output gap of 1.5%, this means: unemployment is 1.5% above the natural rate of unemployment. GDP is 1.5% above potential GDP. inflation is 1.5% above the long-run rate of inflation. GDP is 1.5% below potential GDP.

Correct! GDP is 1.5% above potential GDP.

If the fundamental analysis reveals that the fundamental value of a particular stock is higher than the market price for that stock, you should: buy the stock. sell the stock. purchase a competing stock. remove that stock from your portfolio of assets.

Correct! buy the stock.

Consider the following financial information for The Coca-Cola Company stock. Use this information to answer parts (a), (b), and (c). Coca-Cola Stock price per share: $54.31 Earnings per share: $2.16 Price-to-book ratio: 12.7702 (a) Calculate Coca-Cola's book value per share. (b) Calculate Coca-Cola's price-to-earnings ratio. (c) PepsiCo, Inc. (a competitor for Coca-Cola) has a book value per share of $9.97. If PepsiCo has the same price-to-book ratio as Coca-Cola, what is the value of PepsiCo's stock? Select all that apply. You have to select three answers for this questions. Find Coca-Cola' book value per share, Coca-Cola' price-to-earnings ratio and PepsiCo's stock price. 54.31 4.25 25.14 12.77 54.31 127.32

Correct! 4.25 Correct! 25.14 Correct! 127.32 price per share and divide it by the price-to-book ratio. Coca-Cola's book value per share = $54.31/12.77 = $4.25; (b) To calculate the price-to-earnings ratio, take price per share and divide it by earnings per share. Coca-Cola's price-to-earnings ratio = $54.31/$2.16 = 25.14; (c) If PepsiCo, Inc. has the same price-to-book ratio as Coca-Cola, we can use that and multiply it by book value per share to calculate the value of PepsiCo's stock price. PepsiCo's stock price = $9.97 x 12.77 = $127.32

When interest rates rise in the United States, what is the effect on net exports and aggregate expenditure? Inflows of foreign savings cause the dollar to depreciate, and this increases exports and reduces imports, leading to a rise in net exports and a rise in aggregate expenditure. Government expenditure rises, and this increases imports, net exports, and aggregate expenditure. The real value of savings increases, leading to increased imports and decreased exports, and this causes net exports and aggregate expenditure to fall. Inflows of foreign savings cause the dollar to appreciate, and this reduces exports and increases imports, leading to a fall in net exports and a fall in aggregate expenditure.

Correct! Inflows of foreign savings cause the dollar to appreciate, and this reduces exports and increases imports, leading to a fall in net exports and a fall in aggregate expenditure.

How do overnight reverse repurchase agreements work? The Open Market Trading Desk makes loans to banks and charges them an interest rate higher or lower than the discount rate. They set the exact federal funds rate that can be charged by financial institutions. They increase the amount of reserves held by financial institutions and thus allow banks to make more loans. The Open Market Trading Desk sells bonds to banks and agrees to purchase the bonds back the next day at higher prices. This implicitly sets the floor for the federal funds rate.

Correct! The Open Market Trading Desk sells bonds to banks and agrees to purchase the bonds back the next day at higher prices. This implicitly sets the floor for the federal funds rate.

Why does the Federal Reserve target inflation rather than unemployment? The inflation rate is directly related to monetary policy and is thus an easier target to maintain. The Fed cares more about inflation than about unemployment. If inflation is kept low, this automatically keeps the economy at maximum sustainable employment levels. The public will not see the Fed as credible if it targets the unemployment rate.

Correct! The inflation rate is directly related to monetary policy and is thus an easier target to maintain.

Which of the following changes will lead to a decrease in both the price level and the quantity of output in an economy? a rise in aggregate demand a rise in aggregate supply a fall in aggregate demand a fall in aggregate supply

Correct! a fall in aggregate demand

The efficient market hypothesis states that: at any point in time, a firm selling a stock has engaged in efficient production methods. the market price for a stock will always exceed the book value of the stock. at any point in time, stock prices reflect all publicly available information. market supply and market demand interact to reach equilibrium for the stock price.

Correct! at any point in time, stock prices reflect all publicly available information.

Banks whose current reserves are lower than the reserve requirement: demand overnight loans. supply overnight loans. supply bonds in the bond market. have excess reserves.

Correct! demand overnight loans.

If the output gap is negative, then the Federal Reserve will use its floor framework to _____ the federal funds rate, influence short- and long-term interest rates _____, and _____ total spending in the economy. lower; downward; decrease lower; downward; increase raise; upward; increase raise; upward; decrease

Correct! lower; downward; increase

If the output gap is negative, the Federal Reserve will _____ the real interest rate to _____. lower; cool inflationary pressures lower; reduce unemployment raise; cool inflationary pressures raise; reduce unemployment

Correct! lower; reduce unemployment